The Silver Lining for Required Minimum Distributions
By Robert Fezza and Steve Siders
Are you a retiree either approaching or in the thick of required minimum distributions (RMDs)? Do you have a parent who is age 70 ½ or older? If you are or you do, keep reading…
For retirees with qualified retirement accounts, age 70 ½ is an important IRS milestone, as these accounts are subject to required minimum distributions (RMDs). This is when Uncle Sam catches up to you by requiring a withdrawal with taxes deducted. To avoid a hefty penalty, your RMD must be taken from your retirement account on an annual basis, by calendar year-end.
But what if you don’t need the income for current living expenses, or taking the income will result in paying higher taxes or increase your Medicare insurance premiums?
If you’re over age 70 ½ , you have the option of making a Qualified Charitable Distribution (QCD). Instead of taking an RMD, a QCD permits a direct transfer of up to $100,000 from your IRA to a qualified charity or multiple qualified charities. Depending on the amount of your RMD and the size of your donation, QCDs can automatically satisfy part or all of your required minimum distributions (RMDs) for the year when the QCD is made. It’s important to know that funds that have already been distributed from an IRA to the IRA owner, and are then contributed to charity, don’t qualify as a QCD.
Here’s the silver lining: The amount of the QCD is subtracted from the RMD amount on your taxes, thereby reducing your adjusted gross income (AGI). You have not just reduced your taxable income, but you also may have reduced your Medicare premiums. Medicare premiums for Parts B and D are determined by your modified adjusted gross income (MAGI), which is adjusted gross income plus tax-exempt municipal bond interest, calculated for two years prior. If your MAGI is even one dollar over a premium threshold, you’ll pay the higher premium. But since you’ve lowered your AGI, you also may have lowered your MAGI and thus, your premiums are calculated on a lower income base.
Giving a portion of your RMD to a charity through a QCD allows you to reclaim the lost charitable deduction that the new tax laws eliminated. However, this strategy is nuanced and you should have meaningful conversations with your financial advisor and CPA to ensure you’ve complied with all the requirements. If you have questions about your RMDs or the opportunity for QCDs, let us know, we’ll be happy to help.
Life’s a journey—navigate it wisely!
Robert Fezza, CFP® and Steve Siders, CFP® own Odyssey Personal Financial Advisors, 500 Sun Valley Drive, Suite A-6, Roswell, GA. Their firm specializes in working with people who are serious about making progress toward financial goals. Odyssey manages portfolios greater than $250,000. 770-992-4444, www.odysseypfa.com. Securities offered through Cetera Financial Specialists LLC, member FINRA/SIPC.